Status of Property Tax Portability

Many of our clients have asked us about what happens to their Property Tax when they move. This Article should help clarify the current status and pending legislation to expand it.

As always, if you have any questions about your real estate, business, estate planning, or any other legal issue, please let us know by e-mailing me at kbdunnagan@bpelaw.com.

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One of the most significant decisions which Californians must address when deciding whether to buy a home or move from their existing home is the impact of Property Tax expenses.

All States charge property owners a tax on the real property they own and these funds make up a significant portion of a State’s budget. Generally, property tax rates run at an average of 1.0 – 1.5% of a home’s value as determined each year by a Tax Assessor. That valuation multiplied by the percentage tax rate determines the actual Property Tax charged.

However, in States like California with rapidly rising property values, the ability of homeowners to afford the increasing Property Tax has been a significant problem.

In 1978, the voters passed Proposition 13 (commonly called “Prop 13”) which set the Property Tax assessment at the property’s purchase price and generally limited future tax increases to no more than 2% per year. Prop 13 has kept homes affordable for those who stay in their homes and don’t move. And this has been particularly helpful for seniors, retirees, and others on fixed or limited incomes.

Over the past 40 years since its passing, Prop 13 has enabled millions of homeowners to stay in their homes as well as keep their other real estate which they might have otherwise been forced to sell due to tax increases.

Subsequently passed Propositions 58 and 193 effectively extended the Prop 13 protections to those who receive homes and other real property from their parents and grandparents.

Of course, there are always unintended consequences. Since the Prop 13 benefits end when a person moves or transfers the real property to anyone other than a child or grandchildren, people have tended to stay in their homes much longer than the normal 5-7 years.

This has resulted in less homes available for re-sale to prospective homeowners. To address this, in 1986, the voters passed Proposition 60 that allowed homeowners age 55 and older to retain their Prop 13 benefits if they move to another home of equal or lesser value within the same County. But they could only do this once.

The ability to transfer Prop 13 tax benefits from one property to another is called “Property Tax Portability.”

Prop 60 has facilitated housing redevelopment and availability particularly in larger Counties such as Sacramento. But, it locked the homeowners into staying in the same County.

To deal with this problem, in 1989, the voters passed Proposition 90 which allowed property owners to retain their Prop 13 tax benefits if they moved to another County but only if that other County agreed to allow the transfer. It must be remembered that while the above tax benefits have been very important for property owners, they have a negative impact on the County’s property tax revenue.

Counties want and need the increased revenue from increased Property Taxes in order to handle their growing expenses for services, infrastructure, etc. For that reason, only 11 of California’s 58 Counties have been willing to allow Property Tax Portability into their Counties. They are:

Despite the above-identified conflict between the financial interests of property owners and the financial needs of Counties, efforts are underway in the California legislature to extend Property Tax Portability by allowing such transfers to any county in the state, starting Jan. 1, 2019.

This would require an Amendment of our current State Constitution. Two complimentary Bills are working their way through the State Legislature: (1) Assembly Bill ACA7 would place the Constitutional Amendment measure on the Ballot (if 2/3 of the Legislature approves); and (2) Assembly Bill AB1322 which would implement the new law if it passes.

It is unclear at this point whether either measure will in fact make it to the Ballot. Both measures were referred into Legislative Committees after being introduced earlier this year.

AB1322 passed the Assembly Revenue and Taxation committee with 10-0 bipartisan support and is now with the Appropriations Committee. Proponents of the new law include the Howard Jarvis Taxpayers Alliance as well as the California Association of Realtors and other real estate interests.

“We think that it will prove to be an integral part of addressing the housing crisis in California. It will provide an incentive for empty-nesters to move out of bigger homes and to downsize and make their previous home available for younger families,” said Jon Coupal, president of the Jarvis group.

On the other hand, the California State Association of Counties and the League of California Cities oppose it, saying it would result in a loss of tax revenue to local governments and erode their decision-making process. The State Board of Equalization estimates that the measure would cost local governments $1.9 million a year in lost taxes on replacement homes.

As this matter evolves, we will keep you posted.

The attorneys of BPE Law Group, PC. have been advising our clients on real estate and business issues for over 20 years and have been very involved with Property Tax Reassessment challenges. If you have questions concerning any legal matter, give us a call at (916) 966-2260 or e-mail Keith at kbdunnagan@bpelaw.com. Our flat fee consult for new clients may get you the answers you need for the questions you have.

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are facing a legal issue of any kind, get competent legal advice in your State immediately so that you can determine your best options.